China's economic success sets an example the world should follow

China has bucked the crisis with high investment and a strong state sector that could be replicated by western economies

China, which combined expansionary monetary policy with an investment-led stimulus, has experienced more than 9% annual average growth throughout the four years of the financial crisis. Photograph: Jason Lee/REUTERS

Friday 13 July 2012 12.08 EDT
First published on Friday 13 July 2012 12.08 EDT

Few things better illustrate the difference between the state of China's economy and that of the rest of the world than the fact that its newly announced GDP growth figures of 7.6% were analysed as a "slowdown". In any other major economy this would have been considered blistering growth threatening overheating. Instead, it is clear China has room for further stimulus measures in the second half of the year.

Indeed, as the international financial crisis has unfolded, there have been few starker contrasts than those between China, the US and the EU. Europe has combined loose monetary policy with little or no stimulus to the productive economy – the "austerity" approach. The result has been that the EU's economy shrank by 2% over four years – the UK's shrank by 4.4%. The US has combined loose monetary policy with a consumer stimulus delivered via the budget deficit. The result? The US economy has grown by 1.2% in four years. India, which followed the US model of a budget deficit delivering a consumer stimulus, saw its growth decline from 9.4% in the first quarter of 2010 to 5.3% in the first quarter of 2012.

Meanwhile China, which combined expansionary monetary policy with an investment-led stimulus, has experienced more than 9% annual average growth throughout the four years of the financial crisis.

Unfortunately for this thesis China's performance during the international financial crisis continued long-term economic trends. China's annual average GDP growth since launching its economic reforms in 1978 has been 9.9%. China has the world's most rapid growth of both household and total consumption – ie including government services such as education.

When confronted with such gigantic economic growth and improvement in human living conditions the rational response would be to study the case intently to find out what can be learned from such success. But instead, a strange new approach has been developed: China is more economically successful than the rest of the world therefore it must be China's economic policies which are wrong!

To put this more precisely, China's economic structure differs significantly from most of the world. It has a higher investment level and a much larger state sector than most economies. But instead of concluding from this that the rest of the world should move towards China's structure, by increasing investment and expanding the state sector, instead it is apparently China which should bring its economic structure into line with the rest of the world – doubtless thereby simultaneously bringing its growth rate and elimination of poverty down to the same slower rate.

Deng Xiaoping's is a far more "classical" Marxist analysis than the one from Stalin which the USSR inherited – one in which the market was eliminated in a single step with the five-year plan of 1929. Much of Deng's analysis reads like a commentary on Marx's most extended writing on socialist society, his Critique of the Gotha Programme.

Marx wrote: "What we have to deal with… is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect… still stamped with the birthmarks of the old society from whose womb it emerges." Marx thought that in this new society markets will continue for a prolonged period: "the same principle prevails as that which regulates the exchange of commodities, as far as this is the exchange of equal values."

Marx concluded: "Right can never be higher than the economic structure of society… after the productive forces have also increased … and all the springs of co-operative wealth flow more abundantly – only then can … society inscribe on its banners: From each according to his ability, to each according to his needs!" China's overall economic policy framework, with its central categories of "socialist market economy" and "primary stage of socialism", is clearly merely paraphrasing Marx.

Most people in the west will not wish to adopt a Marxist framework. But they can equally understand China's economic policy through the framework of Keynes. The Keynes who wrote, "the duty of ordering the current volume of investment cannot safely be left in private hands." That it was necessary to have, "a socially controlled rate of investment." Who wrote: "I expect to see the state… taking an ever greater responsibility for directly organising investment." And who advocated: "a somewhat comprehensive socialisation of investment."

Deng Xiaoping's most famous remark was: "it doesn't matter if a cat is black or white provided it catches mice". It is not the most important issue whether one wishes to describe China's economic policy in Keynesian or Marxist terms. What is important is its prodigious ability to catch mice: it is delivering both the world's most rapid long-term economic growth and the most successful response to the financial crisis. For these reasons it is urgent the rest of the world learns from it.